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2007
Banking the Poor: Overcoming the Financial
Services Mismatch
Michael S. Barr
University of Michigan Law School, [email protected]
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Part of the Banking and Finance Law Commons, Law and Economics Commons, Social Welfare
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Publication Information & Recommended Citation
Barr, Michael S. "Banking the Poor: Overcoming the Financial Services Mismatch." In Ending Poverty In America: How To Restore the
American Dream, edited by M. Crain, J. Edwards, and A. L. Kalleberg, 144-50. New York: New Press, 2007.
This Book Chapter is brought to you for free and open access by the Faculty Scholarship at University of Michigan Law School Scholarship Repository.
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B ANKING THE POOR:
OVERCOMING THE FINANCIAL
SERVICES MISMATCH
MichaelS. Barr
Low-income households often lack access to bank accounts and face high costs
for transacting basic financial services through check cashers and other alterna­
tive financial service providers. Twenty-two percent of low- and moderate­
income American households do not have a checking or savings account. Many
other "underbanked" families have bank accounts but still rely on high-cost
financial services.
These households find it more difficult to save and plan financially for the fu­
ture. Living paycheck to paycheck leaves them vulnerable to medical or job emer­
gencies that may endanger their financial stability, and lack of longer-term savings
undermines their ability to improve skills, purchase a home, or send their children
to college. High-cost financial services and inadequate access to bank accounts may
undermine widely shared societal goals of reducing poverty, moving families from
welfare to work, and rewarding work through the Earned Income Tax Credit.
The basic problem is our financial services mismatch: the mainstream finan­
cial system is not well designed to serve low- and moderate-income households.
Traditional checking accounts often carry high account fees, high minimum
balances, and high overdraft or insufficient-fund fees. Paper checks are held for
a relatively long rime before deposits are cleared. And millions of households
who have had problems managing their accounts in the past are stuck in
Chexsystem, a private clearinghouse used by most banks to block such individ­
uals fro� opening new accounts.
The costs of financial exclusion are great. It is inefficient for the national
economy. It is costly for low-income households. And it promotes dissaving
rather than saving.
We need to shift our focus away from checking accounts and toward debit­
card-based products and services that are lower cost and lower risk. Taking the
paper check out of the equation and moving to direct deposit, ATM and point­
of-sale withdrawals, and automatic money orders would lower costs and drive
the risk of overdraft way down.
Congress should encourage the private sector to offer low-cost, electroni­
cally based bank account products with a new tax credit. The tax credit would
REDUCING WEALTH DISPARITIES THROUGH ASSET 0\VNERSHIP
145
be based on performance. Financial institutions could receive a tax credit equal
to a fixed amount per account opened. Additionally, the credit could include a
dollar-for-dollar incentive for banks to match the monthly savings contribu­
tions of low-income account holders, up to a fixed amount. Bank accounts with
debit-card access, but no checks, could provide a means for lower-income
households to receive their pay through direct deposit, pay their bills automati­
cally, and set up regular savings plans as a cushion against emergencies.
It is time to transform financial services for the poor. Bank account own­
ership contributes to optimal income-redistribution policies because it in­
creases the take-home pay of the low-wage working poor. Better access to
financial services is critical for low-income persons seeking to enter the eco­
nomic mainstream. 1
NOTE
I. For further background, see MichaelS. Barr, "Banking the Poor," Yale Journal on
Regulation
21, no. I (2004): 121-237.
INDIVIDUAL ASSET POLICY
Individual asset policy is an important policy arena for reducing racial wealth
disparities. For generations certain policies in the United States have helped
provide resources to support the aspiring middle class and well-to-do Ameri­
cans build assets. As we discussed, the array of homestead acts greatly facili­
tated the building of America's middle class. Land-grant colleges, Veterans
Administration benefits, the GI Bill of Rights, and mortgage interest deduc­
tions also provide important asset-building foundations. It is hard to imagine
that many Americans would have been able to plan for the future, buy homes,
prepare for retirement, send their children to college, and weather unexpected
financial storms without access to these important asset-building resources.
The magnitude of direct and indirect governmental resources devoted to
these resources is startling. Through the tax code that allows individuals and
families lower rates or to exclude taxable earnings, the taxpayers financed
$335 billion worth of asset policies for the nonpoor in fiscal year 2003, most
of which accrued to wealthy families. 15
The kind of individual asset-based social policy that will affect racial wealth
disparities must be directed to poor individuals and families to help them
build assets, just as the government subsidized the movement of the World
War II generation into the middle class and homeownership and helped the
well-off consolidate their wealth.16 The major policy tool to accomplish this
146
ENDING P OVERTY IN AMERICA
has revolved around various configurations of individual development ac­
counts (IDAs).
Asset-based social policy attempts to facilitate savings and the accumula­
tion of financial assets for low-income families and the poor who are usually
excluded from traditional asset-building opportunities. Although asset-based
social policy is still in its infancy, it has become a widely discussed policy tool
and has a fairly impressive set of achievements. Michael Sherraden, the major
architect of IDAs, discusses this policy in Chapter 12.
The concept of IDAs has increasingly morphed into a comprehensive set
of supports to asset building over the life course. Children's Savings Accounts,
for example, would enable youth to enter young adulthood with a sizable asset
that they can use for education or homeownership, while traditional IDAs
would help families hoping to pay for a home or their children's higher educa­
tion, and retirement accounts would enable seniors to have greater indepen­
dence and control over their financial life in their twilight years. (President
Clinton proposed Universal Savings Accounts in his 1999 State of the Union
address.)
Supporters insist that all these accounts must be universal yet progressive.
Universality enables the program to create broad-scale social support that a
poverty-focused program would have difficulty garnering. Including progres­
sivity in the design of these programs would enable them to provide signifi­
cantly more resources to the poor. For example, matches would be provided
for contributions by low-income households. This would enable them to
generate greater rates of savings and asset accumulation than those without
matches. To the degree that African Americans and Latinos are dispropor­
tionately consigned to the lower classes, they would theoretically be eligible
to build assets at a faster rate and thus reduce, but certainly not close, the
racial wealth gap. These mechanisms have demonstrated significant potential
to begin the process of asset building that can launch families on the road to
economic success and stability, even if by themselves IDAs may not reduce
wealth inequality.
While these policies are gaining legitimacy and policy traction in a short
period, they face innumerable obstacles. So far, these programs have been
implemented on a small scale, in terms of hundreds or thousands of partici­
pants. To make a difference, they must be implemented on a large scale, with
millions of participants. However, these programs require significant funding
that is unlikely in the current budget context. For example, a Children's Sav­
ings Account that would provide every child with a $1,000 account at birth
and create the opportunity for the accumulation of up to $18,000 by age 18
would cost approximately $30 billion a year. Moreover, there is no definable
political constituency that has made individual asset building a prime focus
of its energies.
REDUCING WEALTH DISPARITIES THROUGH ASSET UWNERSHIP
147
REGIONAL EQUITY
Racial segregation has traditionally been a limiting factor in the ability of
African Americans to grow wealth. Segregation imposes a further "tax" on
minorities-particularly African Americans-that is driven by underfunded
communities, poor schools, and economic isolation (see Angela Glover Black­
well's discussion in Chapter 19).
Individual communities cannot reduce racial inequalities alone. The re­
gion should be the focus of action, the only entity with sufficient economic
resources and political power to address these tough problems. As john pow­
ell puts it, "The community's work is on target, but the dynamics of inequal­
ity are region-sized."17
Regional solutions would directly attack racial segregation, isolation from
jobs, and poor schools. If inner-city communities increase the economic and
racial diversity of their communities, create economic opportunities for low­
income residents to connect to the job-rich suburbs, and create a functioning
and attractive public school system, the value of housing assets would likely
increase, helping reduce the insidious processes that thwart the development
of wealth among black inner-city households.
Some regional strategies that have been successful include inclusive zon­
ing to increase the supply of affordable housing across a metropolitan region;
transportation policies that connect isolated inner-city communities with job­
rich suburbs and exurbs; and innovative approaches to educational equity that
break down racially isolated schools, enable equal funding across regions or
districts, and promote small schools that are anchored in neighborhoods.
These are among the menu of regional strategies that could help stop the
continued devaluation of the assets of many African Americans.
PROGRESSIVE TAXATION AND ASSET BUILDING
How are we going to pay for great ideas of asset building and bring them to
scale, especially considering all the pressing issues and big-ticket items facing
our nation, such as health care, the minimum wage, housing, or education?
Rather than thinking about this question in terms of contending worthy
needs jockeying for pieces of the pie, a brief examination of asset building in
America's history and current social investments is instructive. This perspective
allows for broader horizons for asset policy and opportunities to strengthen
coalition building rather than promoting turf battles or fighting about what
need or crisis deserves most attention.
In the United States one major avenue of social mobility and economic
success has been policies and practices that provide resources to middle-class
and well-to-do Americans to build assets. At critical times these structured
148
ENDING P OVERTY IN AMERICA
opportunities served as indispensable springboards for mass mobility. Various
policies have greatly facilitated building America's middle class, especially in
acquiring homes, property, and businesses, sending young adults and veterans
to college, planning for their future, and building a financial assets founda­
tion: homestead acts, land-grant colleges, Veterans Administration benefits,
the GI Bill of Rights, mortgage interest tax deductions, and others. However,
if one examined only direct government expenditures, the social investments
that enabled middle-class success would be hidden.
Similar policies abound today, etched in the tax code, largely out of view
of public understanding and awareness. For example, the national social in­
vestment in housing is not primarily targeted at affordable housing or con­
cerned with housing for low-income families; instead, the greater social
investment is aimed at subsidizing homeownership through mortgage inter­
est tax deductions, which highly favor families at upper-income levels. In
other areas, too, the great magnitude of government assistance for asset ac­
quisition and growth benefits those who already own property or businesses
and/or those at the highest income levels. As previously noted, in aggregate,
the public funded $33 5 billion worth of asset policies for the nonpoor in
2003, using conservative estimates. This wealth budget dwarfs direct govern­
ment expenditures that encourage asset building for most American families.
CFED's18 analysis highlights how our nation invests $1 in direct expenditures
for asset development at the same time it invests $642 to encourage and re­
ward asset building through the tax code. Federal policies exacerbate wealth
inequality and help widen the racial wealth gap by their top-heavy and lop­
sided distribution scheme.
The news has not improved over the past couple of years, as CFED's pre­
liminary analysis for 2006 demonstrates that the wealth budget has risen to
about $362 billion and the distribution has gotten more lopsided and top
heavy. Families with incomes over $1 million, roughly 1 percent of the popu­
lation, received 45 percent of the wealth budget benefits. Those in the top
fifth (income of over $80,000) of the income distribution took in about 88
percent of these benefits.
The budget that builds wealth needs to become a contested terrain, not
the entitled province of the well-to-do. Good asset-building lessons, best
practices, and effective social investment cases can be drawn from how the
wealth budget has operated in the American experience. The absolutely vital
focal point needs to be how to spread effective asset-building incentives to
families that are struggling or just making ends meet, as well as to groups that
have been systematically excluded from these opportunities in the past. A
modest goal might be to increase the percentage share of the benefits accru­
ing to 60 percent of families from the current meager 3 percent to 10 percent
in the next decade. Capping the home mortgage interest deduction and limiting
REDUCING "VEALTH DISPARITIES THROUGH ASSET 0\\NERSHIP
149
it to primary residence is a worthy reform. Allowing a flat deduction for fam­
ilies who cannot or do not itemize deductions is another among a host of re­
forms to more equitably distribute asset-building opportunities written into
the tax code.
This broader context of spreading asset-building opportunities to broad
sectors of the population, that is, democratization of the wealth budget, pro­
vides a different sense of how government invests in individuals, families,
businesses, and communities. Fairness in distribution of tax benefits is an an­
choring theme for progressive taxation, in addition to the traditional concern
of who is taxed at what rate. Taxing corporate profits, capital gains, invest­
ment earnings, dividends, and other ways that money expands itself over tax­
ing work and earning itself provides a principal direction for progressive tax
policy.
Many resources already exist, and this section identified deep sources of
resources to pay for big-ticket asset-generating initiatives such as Children's
Saving Aaccounts or first-time homeownership accounts. Other areas can be
targeted for reform. An obvious candidate is to reform the estate tax in a way
that simultaneously is fairer (thresholds and exemptions) and engages public
support and that links it to providing opportunities to new generations of
Americans. 19 Most relevant are reforms structured around reasonable exemp­
tions grounded in a philosophy that passing along great advantages and
wealth runs against the deep American spirit of fairness, equality, new starts,
and opportunity. Equal opportunity and a level playing field for all cannot
thrive side by side with great inherited wealth.
CONCLUSION
The racial asset gap threatens to permanently consign large portions of the
African American population and other racial minorities to lives with re­
stricted opportunities. In a society that is increasingly privatizing citizen­
ship by making access to good education and health care more and more a
function of wealth, these racial disparities in asset holdings mean less op­
portunity for social mobility and secure lives than ever before. The propos­
als just discussed will in no way equalize asset holdings, but they will lessen
the gap in significant ways. These proposals will help better connect
African Americans and the poor to the mainstream credit system and mar­
kets and enable the poor to save and accumulate assets that they can use to
purchase a home, pursue education, or start a business; connect them to their
regional economies so that they have access to jobs, quality education, and
racially and economically diverse communities; and enable the federal gov­
ernment to invest not only in the asset-building opportunity of the rich and
150
ENDING POVERTY IN AMERICA
well-off, but also of the poor and least advantaged. These proposals place
closing the racial wealth gap at the forefront of the civil rights agenda of
the twenty-first century.
NOTES
l. With the publication of Assets and the Poor by Michael Sherraden (Armonk, NY: M.E.
Sharpe, 199 1), Black Wealth/White Wealth: A New Perspective on Racial Inequality (New York:
Routledge, 1995, 2006) by Melvin Oliver and Thomas Shapiro, and Being Black, Living in the Red
by Dalton Conley (Berkeley: University of California Press, 1999), the notion that assets and
wealth are important and independent elements of economic status was firmly established.
2. Rakesh Kochhar, "The Wealth of Hispanic Households, 1996 to 2002" (Pew Hispanic
Center, 2004).
3. Thomas Shapiro, The Hidden Cost of Being African American (New York: Oxford Univer­
sity Press, 2004), 36-41.
4. Oliver and Shapiro, Black Wealth/White Wealth.
5. Joint Center for Housing Studies of Harvard University, State of the Nation's Housing
2004 (Cambridge, MA : Harvard University, 2004).
6. Kochhar, "Wealth of Hispanic Households."
7. Shapiro, Hidden Cost of Being African American.
8. Joint Center for Housing Studies of Harvard University, State of the Nation's Housing.
9. Roberto Querica et a!., "The Impact of Predatory Loan Terms on Subprime Foreclo­
sures" (Center for Community Capitalism, 2005).
10. Mark Duda and William Apgar, "Mortgage Foreclosure Trends in Los Angeles: Patterns
and Policy Issues" (report prepared for Los Angeles Neighborhood Housing Services, 2004).
1 1. National Community Reinvestment Coalition, "Pre-approvals and Pricing Disparities in
the Mortgage Marketplace" (June 2005).
12. Javier Silva, "A House of Cards: Financing the American Dream" (Demos, January 9,
2005); Tamara Draut and Javier Silva, "Borrowing to Make Ends Meet: The Growth of Credit
Card Debt in the 90s" (Demos, 2003).
13. Michael Barr, "Banking the Poor," Yale Journal on Regulation 2 1 (Winter 2004): 121-237.
14. Keith Erns et a!., "Quantify ing the Economic Cost of Predatory Payday Lending: A Re­
port from the Center for Responsible Lending" (Center for Responsible Lending, February 24,
2004).
15. Center for Enterprise Development, "Hidden in Plain Sight" (2004); Christopher
Howard, The Hidden Welfare State (Princeton: Princeton University Press, 1997).
16. Trina Williams Shanks, "The Homestead Act: A Major Asset-Building Policy in Ameri­
can History," in Michael Sherraden and Lisa Morris, Inclusion in the American Dream (New York:
Oxford University Press, 2006).
17. john powell, "Racism and Metropolitan Dynamics: The Civil Rights Challenge of the
2 1st Century" (briefing paper prepared for the Ford Foundation, Institute on Race and Poverty,
August 2002), 5.
18. CFED was formerly known as the Corporation for Enterprise Development.
19. Oliver and Shapiro, Black Wealth/White Wealth, Tenth Anniversary Edition (New York:
Routledge, 2006); William Gates, Sr. and Chuck Collins, Wealth and Our Commonwealth: Wby
America Should Tax Accumulated Fortunes (Boston: Beacon Press, 2002).